Johnston Press up for sale: what you need to know

Johnston Press, owner of the i newspaper and hundreds of local papers and news sites, has put itself up for sale as its debt burden has become too big to handle. After years of purchasing various titles it now hopes to be swallowed up itself. But what does it mean for investors and the industry?

share

IG Analyst

2018-10-18T17:52:05+0100

Source: Bloomberg

‘By early 2017 the world had woken up to a problem that, with a mixture of impotence, incomprehension and dread, journalists has seen coming for some time. News – the thing that helped people understand their world; that oiled the wheels of society; that pollinated communities; that kept the powerful honest – news was broken,’ – Alan Rusbridger, former Guardian editor and author of Breaking News.

Earlier this year, when the UK government launched a review into the decline of newspapers, the BBC published a rather stark headline that asked if this was ‘The death of the local newspaper?’

Fake news, social media, user-generated content, online competition – whatever the cause, the newspaper industry is in rapid decline. Over 300 local and regional titles have closed down since 2007, circulation numbers have almost halved, and revenue from the print advertising that has long funded newspapers has collapsed by over 70%. The outlook is grim, and not confined to the small publications that form the backbone of the UK news industry: every single national title, from The Sun to the The Sunday Times, has seen circulation continue to plunge this year.

The situation for the 1000 or so local and regional newspapers that have survived just got a lot more serious. Johnston Press, the owner of various titles including the i and The Scotsman, alongside 200 local papers, websites and magazines, is on the verge of writing the last chapter in its 251-year history after being weighed down by its debt burden, forcing the business to put itself up for sale.

Why has Johnston Press put itself up for sale?

In a nutshell: the company has a £220 million bond due to pay on 1 June 2019 that it can’t afford, a large pension deficit, and revenue that has long been in decline because it failed to counter the threat from online competition, partly because the huge debt it built up purchasing more newspapers eventually restricted its ability to invest in its digital capabilities.

Johnston Press, having started with just one title after diversifying from its core printing business by buying The Falkirk Herald in the mid-nineteenth century, started to grow rapidly from 1970 when it expanded out of its homeland of Scotland by purchasing local publications over the border. Having started up north in places like Yorkshire, the company’s coverage eventually reached South England, when it decided it was the right time to go public.

Johnston Press was welcomed by the London Stock Exchange (LSE) in 1988, offering a unique proposition by being the only listed company solely focused on local and regional newspapers. Investors understandably assumed the rapid growth was to continue and its listing only fuelled the appetite for expansion. As Johnston Press entered the new millennium it had over 170 regional newspapers and had already made ground making the move to digital with over 50 websites.

Johnston Press’s mergers and acquisition-led debt burden weighs heavy

The acquisitions got bigger, but the way Johnston Press was funding them stayed the same. Net debt at the end of 1999 stood at just £68.8 million but exploded after it continued to buy more titles across England, expanded into the Ireland, and acquired its biggest title yet, The Scotsman. After it purchased the newspaper in 2006 the firm had positioned itself as one of the largest regional groups in the country with over 320 titles. However, it also caused net debt to peak at £783 million - six times greater than annual pre-tax profit that year, which had started to decline as margins from print advertising started to come under pressure from online rivals.

By the time the financial crash started to rear its head in 2008, the unsustainable expansion could no longer be ignored. The £160 million it spent on The Scotsman proved to be the limit for what had been a board with a relentless aspiration to expand through acquisition, and debt was brought down over the coming years to below £500 million, but it was still unsustainable. Roger Parry, in what was his last statement as chairman of the company, apologised to investors for experiencing an ‘especially painful’ year in 2008 when it had to raise £205 million to help reduce debt levels, partly through a rights issue (the second following a £220 million rights issue in 2002, to help fund the acquisition of Regional Independent Media Holdings for the staggering price of £550 million). Both Parry (after 12 years) and chief executive officer (CEO) Tim Bowdler (after 15) resigned after growing concerns over its unsustainable debt saw its share price plunge from a peak of over £60.00 in early 2005 to just 183p by the end of 2008.

Johnston Press failed to fully recognise online threat

Johnston Press was not initially slow in the move to digital and had been spending the majority of its capital expenditure on launching new websites and mobile apps. Digital was the only area providing growth as advertisers moved online, so continued investment was (and still is) critical. However, the new board, already tasked with dealing with the quickly deteriorating environment that was hitting the wider print industry, had to address the company’s debt. Deep cost cuts were made and capex was reduced to the ‘lowest possible level’, meaning its investment in the all-important digital arena had to be sacrificed.

The company also severely underestimated the new online competition that was emerging and how quickly they would take over. Like most local and regional papers, Johnston Press derived most of its revenue from selling print adverts for motors, jobs and property – three staples you find in almost every local publication. However, the financial crash led to faster growth for the likes of online aggregators and comparison websites than was anticipated, and the papers quickly lost out as sites such as AutoTrader, Indeed and eBay all gained ground.

How it handled print advertising for property is an ideal example. Despite having seen adverts for jobs and motors decline in the years leading up to the financial crash, the company still believed the property pages would survive after revenues hit an all-time high in 2006. A year later, when revenue from print property advertising started its lengthy decline, Johnston Press was still adamant that its newspapers would ‘continue to be the main source of promotional and marketing activity for the majority of estate agents’, and that its online search engine would be the complementary service. That belief was in spite of the fact the online property portals (like Rightmove as one example) was already starting to surpass Johnston Press in terms of revenue:

Similarly, ZPG Group-owned Zoopla was generating over £60 million in revenue by 2013, just five years after being launched, and last year its property sites (also including the likes of Prime Location) generated £122 million in revenue.

Johnston Press revenue lost to giants like Facebook and Google

Coinciding with the purse strings being tightened and the economic downturn, digital revenue started to fall in 2009 and although it quickly started to recover it has been nowhere enough to offset the sharp drop in print advertising over the last five years as advertisers continue to favour major online players such as Facebook and Alphabet’s Google.

The impact of Google and Facebook on the advertising industry cannot be understated – combined they account for anywhere between 60% to over 80% of the world’s digital ad market, depending on what estimates you read. Even if you disregard that as a figure for the national newspapers to worry about and not of great concern to Johnston Press’s swathe of local titles, the small local businesses that advertise in them are more empowered than ever to manage their own marketing through the likes of social media, and at a cheaper rate than what newspapers with declining circulation can offer.

How has Johnston Press performed in recent years?

Johnston Press has reported annual pre-tax losses for two consecutive years with revenue continuing on its long-term decline. Its performance has improved. The company turned to a pre-tax profit of £6.2 million in the first half of this year, from a £10.2 million loss 12 months earlier, and although revenue continued to fall (down 10%), costs have fallen at a faster rate to help restore profitability. Operating margins in the first half recovered to 8% from only 4.7% the year before, but are still way below the 21% reported in 2014 and 35% in 2005.

Why can’t Johnston Press refinance or tackle its debt?

Johnston Press, currently boasting a market cap of below £3 million, has well over £200 million worth of debt. Ashley Highfield, a former BBC and Microsoft man, took over at the helm of Johnston Press in 2011 (succeeding a brief stint from John Fry who was CEO from 2009). Until his resignation in May, citing family reasons, Highfield had spent seven years cutting costs and trying to shore the company up.

This included the major refinancing conducted in 2014 which gave birth to the bond that has forced Johnston Press to put itself up for sale. The company launched a placing and yet another rights issue to raise £140 million and issued the bond for another £220.5 million. That essentially consolidated its £302 million worth of debt and was designed to make the pile manageable enough that it could continue reducing debt at a lower interest rate (the bond is at 8.625% versus the previous average rate on its debt of 11.7%) while raising expenditure on its investment-starved operations to help battle against tougher conditions. However, the bond also came with strict provisions including one that has restricted its ability to pay dividends over the past four years.

Additionally, Johnston Press had the added debt spawning from its £90 million pension deficit, which it agreed to plug at a faster rate under the 2014 refinancing. This has been where its dwindling cash flow has been directed, with its pension deficit down to £41 million at the end of June 2018. The company generated an operating cash flow of £9.2 million in the first half of this year, up from £4.4 million year-on-year (YoY), of which £5.3 million (58%) was ploughed into its pension scheme. It plans to pay the same contribution in the second half of 2018.

Meanwhile, Johnston Press has repurchased just £20 million worth of bonds over equal instalments spread over 2015, 2016, 2017 and the first half of 2018. Over the same period the company has paid close to £62 million in interest charges, with a further £11.5 million due in the second half.

Still, to the surprise of some, the firm had room for one major acquisition that would make it the UK’s fourth largest print publisher, with over 600,000 paid copies sold each day. The £24 million purchase of the i newspaper in early 2016 was hailed as a ‘transformational acquisition’ by Highfield, giving it a new landmark title that provided more stable circulation numbers. Plus, it announced it would fully leverage the i brand by investing in new digital sites at a time when it was making deep cuts to editorial jobs and rationalising the rest of its portfolio.

i newspaper: the jewel in Johnston Press’s rusty crown

The i newspaper was originally launched as a concise paper offering short and to the point articles by The Independent newspaper in 2010, and was Britain's first new daily national newspaper in nearly 25 years. Johnston Press lifted circulation by 5% in the first year of ownership, saw double-digit growth from the Saturday edition, and launched a new dedicated website.

On all metrics the i newspaper was defying the rest of the industry on several fronts when Johnston Press purchased it. However, part of that initial boost came from the fact that print editions of both its sister titles, The Independent and The Independent on Sunday, were shut down when the i was sold to Johnston Press, naturally enticing fans of the print editions to move over to the i publication, and the fact it was launched in Northern Ireland.

Still, the i newspaper has been regarded as a success under Johnston Press over the last couple of years. Despite sales of the paper under the firm declining from around 270,000 daily copies to under 245,000 today, circulation revenue in the first half of this year was up 17%, partly thanks to price lifts (a copy costs 60p today and £1 for the Saturday edition from the original 20p when it was first launched). In addition, the website is now the tenth largest of all the national press sites with around 4.2 million visitors in June versus just 1.3 million in December last year.

Plus, market share of main news advertisers has risen to 22% from 20% upon acquisition, and advertising revenue from the print and digital publications was up 20% in the first half of 2018, when earnings continued to grow after spiking over 60% to £6 million from £3.7 million. For perspective, the firm’s overall adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) in the first six months of this year was down 3.7% to £19 million.

In the first year of ownership in 2017, EBITDA rose to £9.2 million from £5.2 million under The Independent the year before. That was equal to almost one-quarter of Johnston Press’s overall adjusted EBITDA of £40.1 million last year. Having paid £24 million for the paper the i has already generated close to £18.6 million of adjusted EBITDA for the business.

Although the company’s swathe of acquisitions over the last decade are now being scrutinised, the purchase of the i newspaper (despite its financial position) has been seen as good deal, but the progress being made by the national title – which boasts 19.5% of the ‘quality market’ (made up of the papers in the circulation chart above) – is simply not enough to counter the dramatic deterioration within its local and regional titles. National papers have by no means escaped the drop in demand for print publications but they are proving much more resilient than regional titles. Print advertising in the quality market has continued to fall but at its slowest rate for around ten years during 2018 and, out of the 73.5 million newspapers that are circulated each week, 42.1 million (57%) are national titles with the other 31.4 million (43%) comprised of local and regional ones. Average circulation of local UK newspapers has decreased by 34% over the past decade, while daily local newspaper circulation has dropped 31%.

Johnston Press likely to be broken up if it can find buyers

Johnston Press may not be in the best shape overall but it has many attractive elements that could entice buyers. No bidders have made an approach, so the company has put the ‘for sale’ sign up to invite offers and although it is hoping to be sold as a single entity the more likely scenario will see the company picked apart.

Taking on Johnston Press as a whole would be a monumental task, therefore any interested parties are likely to cherry-pick the parts that would complement their own businesses (although Johnston Press believes there is ‘reasonable prospect’ for it to be sold as one). The i, The Scotsman (which is thought to circulate about 13,000 copies per day in its core markets of Edinburgh and Lothian) and other trophy titles like The Yorkshire Post will be at the forefront of the shop window but, despite the likelihood of attracting buyers, they all come with their own problems which any suitor will have to take on if they decide to make any form of bid. Its digital operations, although starved of investment, offer opportunities for others to accelerate their digital transformation strategies while its printing operations in Portsmouth, Sheffield and Portadown could also attract interest.

The real concern comes down to the rest of the business, the engine room of local news publications spanning Scotland, England and Northern Ireland (it sold off its Republic of Ireland papers for about £7.2 million in 2014, nine years after purchasing them for a whopping £115 million). The larger publications in major cities such as Leeds and Edinburgh are likely to draw attention from other regional publishers seeking to take the opportunity to expand, but the major fear is that any of the smaller titles, many of which are the sole titles in their local communities, will be lost if another company isn’t willing to buy them. One undeniable round of applause that Johnston Press deserves is the fact that it has avoided having to shut any of its local titles while rival publications have closed.

But now, quite simply, hundreds of local newspapers are being threatened with closure. Johnston Press has over 35 titles across the Midlands and a similar amount spanning Scotland. In Yorkshire, the North Midlands, the North-West and the South of England it has over 20 papers in each region, over 15 titles in the North-East plus another 17 publications in Northern Ireland. Government figures sourced from ABC outlining the top weekly and daily local newspapers do not feature any Johnston Press publications and only one of the top paid for weekly papers, which doesn’t bode well for its portfolio.

Disgruntled Johnston Press shareholders keep quiet

The firm’s biggest shareholder has previously been outspoken about how the company has been managed. Eccentric Norwegian investor, Christen Ager-Hanssen, began building a stake in the company in August 2017 when Johnston Press had a valuation of about £25 million and is now the single largest investor.

The investor has used some colourful language to describe how the company has been managed. He pulled out of an attempt to oust Highfield and others from the board last year but his pressure is still thought to have been a major driver behind Highfield’s decision to resign in May, with finance director David King having been at the helm since. Ager-Hanssen, who started investing in the hope of salvaging the company with a new board and new lenders, had described Highfield and others as ‘fee suckers’ who were inevitably throwing shareholders under the ‘restructuring bus’. Reports state that Ager-Hanssen, apparently resigned to the company’s demise, had previously claimed Johnston Press was going to place itself into administration before putting itself up for sale, which has now been proven untrue and possibly implies the growing disconnect between the board and its largest investors.

Johnston Press major shareholders

Custos Equity AS (run by Christen Ager-Hanssen)

20.01%

PanOcean Management (run by Ananda Krishnan)

10.63%

Crystal Amber Fund (run by Richard Bernstein)

10.48%

Majedie Asset Management

9.87%

Raymond Stanley Tindle

6%

(Source: Johnston Press, as of 10 October 2018)

Ager-Hanssen has been tight-lipped on his next move following Johnston Press putting itself up for sale, but the investor did state following the announcement that he was ‘not surprised’ because management had been ‘running the company down the drain’, describing the publisher’s fall from grace as a ‘self-fulfilling prophecy’. He may be adopting a ‘wait and see’ approach but Ager-Hanssen is one to keep an eye out for if and when bids start to roll in. Existing investors may prove the best hope for keeping the company together and avoiding a total break up.

Where next for the Johnston Press share price?

Johnston Press shares are currently trading at an all-time low and are valued at just £2.8 million. In addition to tough market conditions and burdensome debt the company added more woes by announcing higher paper costs and the expense of implementing general data protection regulation (GDPR) would further hurt its performance, sending shares down.

However, shares received their biggest boost for some time in July this year when Ager-Hanssen’s Custos Group was preparing to table proposals in order to aide the company’s debt position which ultimately didn’t yield any fruit, following small gains after Highfield resigned in May.

Who might Johnston Press’s potential buyers be?

Existing investors, rival publishers and private equity are all likely to be circling Johnston Press and evaluating the company. Private equity is likely to be attracted by the company’s positive cash flow that shows the business has potential if you can get past the eye-watering amounts of debt it has on the books, while rivals like Reach (formerly Trinity Mirror) and Newsquest are likely to be interested for obvious reasons.

Like their wounded peer, both Reach and Newsquest have been rapidly expanding through acquisition in recent years. Reach, which owns the Daily Mirror, changed its name after agreeing to buy the Daily Express earlier this year, building on other major deals such as the purchase of Local World in 2014. Meanwhile, Gannett-owned and more locally focused Newsquest has bought the likes of Dunfermline-based Romanes Media Group, Welsh publisher NWN Media and Carlisle-based CN Group.

At the end of 2017 Johnston Press was estimated to hold about 9% of the UK local and regional press market, behind Newsquest at 13% with Reach by far the market leader with 29%, according to government figures, collectively accounting for over half of the entire market.

What might Johnston Press be valued at?

Current valuations are unclear because it is not known whether Johnston Press will be sold as one single company or be broken up. Its market cap stands at £2.8 million, annual revenue stands at around £200 million and adjusted EBITDA at about £40 million.

The i newspaper is what most have been focusing on, but placing a value on the paper will be difficult because Johnston Press is still benefiting from deals struck when it bought the i, such as an £850,000 annual content deal with The Independent and the London Evening Standard, which will expire next year. Some analysts have, however, suggested a price tag close to £60 million, on expectations it will deliver an annual profit this year of about £12 million.

As the business has placed itself up for offer, any interested bidders will be able to submit an offer under phase one which, if agreed, will then be able to move into phase two when details will be ironed out and, hopefully, formal offers will be tabled. Johnston Press can, for whatever reason, terminate the formal sales process at any time and there is no guarantee that it will sell all or any part of the business.

The collapse of Johnston Press: the death of local newspapers?

‘The written word still has significant power in news provision. The challenges facing the press sector therefore have potentially significant implications for the overall provision of news in the UK. While increasing online engagement is often seen as a means to nurture citizen journalism and new approaches to news provision, large press operators are important entities to pool risk, to fund investigation and newsgathering, and to ensure exposure and impact,’ – UK Department for Digital, Culture, Media and Sport report, April 2018.

Having become the latest and possibly the last CEO to inherit the huge debt problems at Johnston Press, King is right to say that the company is ‘obliged’ to discover the real value of the business for shareholders that have had little reason to be positive for years, and equally correct to say that there is ‘significant value here that another player could unlock’. Following all the years of purchasing titles and growing into a larger publisher, Johnston Press will now itself have to be gobbled up, in parts or as a whole. King’s comment that consolidation among local and regional newspapers was ‘overdue’ might be sore for some investors who wish it was the company unlocking its own value. While Johnston Press shareholders will be wondering what the future holds for their investment, everyone else should be worrying what it means for news on both a local and national level.

Share this article

share

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

CFDs are a leveraged product and can result in losses that exceed deposits. You do not own or have any interest in the underlying asset. Please consider the Margin Trading Product Disclosure Statement (PDS) before entering into any CFD transaction with us.

Please ensure you fully understand the risks and take care to manage your exposure.

IG does not issues advice, recommendations or opinion in relation to acquiring, holding or disposing of our products. IG is not a financial advisor and all services are provided on an execution only basis.

The information on this site is not directed at residents of the United States and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.